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Buy Citi when it hits $15

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Citigroup (NYSE: C) logo Today's announcement that Citigroup (NYSE: C) will take $49 billion worth of Structured Investment Vehicles (SIVs) onto its balance sheet suggests to me that its new CEO is following a path I wrote about earlier this week -- the first step of which is to take a big bath write-down fast. I think Citi stock will fall further before hitting bottom -- say $15.

Why is Pandit doing this? First, investors give a new CEO a chance to put all his predecessor's mistakes in the past through a write-down -- which generally includes closing businesses and firing staff. Second, Pandit probably realized that the alternative -- a fire sale of securitized assets (the average net asset values of SIVs tumbled to 55% from 71% a month ago and 102% in June) -- would be the lesser of two evils.

Nevertheless -- Pandit's move came with pain attached. Bloomberg News reports that two hours after Citi's announcement, Moody's Corp. (NYSE: MCO) lowered its credit ratings to Aa3, the fourth-highest level, from Aa2, saying "capital ratios will remain low." Citi's capital ratio is likely to tumble far below its target -- causing it to take further capital preservation moves. Specifically, its Tier I capital ratio is likely to hit 6.8% by the end of this year from 7.32% on September 30 -- far short of its 7.5% target.

Expect more unpleasantness -- like a cash dividend cut -- as Citi stock continues to tumble. But I think if it hits $15, it may be worth considering an investment.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in Moody's securities.

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Last updated: November 24, 2009: 03:01 PM

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